From 6 April 2024, the Lifetime Allowance was abolished and two new allowances were introduced, the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.
What is the Lump Sum Allowance?
The Lump Sum Allowance (LSA) is the limit on the total amount of certain tax-free lump sums that you will be able to receive before marginal rate taxation applies. The limit is £268,275 but may be higher if you have a former Lifetime Allowance (LTA) protection.
Each time you take a tax-free lump sum from your benefits or savings, you’ll use up some of your Lump Sum Allowance.
What is the Lump Sum and Death Benefit Allowance?
The Lump Sum and Death Benefit Allowance (LSDBA) is the limit on the total amount of tax-free lump sums that can be paid in respect of an individual before marginal rate taxation arises. This includes any tax-free lump sums used up under the LSA, any benefits paid to you as a serious ill-health lump sum before age 75 or any tax-free Lump Sum death benefits payable in the event of your death before age 75. The limit is £1,073,100 but may be higher if you have an LTA protection.
Each time you take a tax-free lump sum from your benefits or savings, or a tax-free lump sum is paid following your death before age 75, you’ll use up some of your Lump Sum and Death Benefit Allowance.
How close are you to the limits?
Your LSA and LSDBA are worked out slightly differently depending on whether you have taken benefits before or after 6 April 2024.
Here’s how to work out roughly how close you are to the LSA:
- 25% of the amount of Lifetime Allowance you have used for any benefits taken prior to 6 April 2024.
- 25% of the amount of any benefits transferred overseas to a Qualifying Recognised Overseas Pension Scheme before 6 April 2024.
- If you turned 75 before 6 April 2024, 25% of the value of any unclaimed pension benefits at your 75th birthday.
Plus
- The value of any benefits paid as a tax-free cash sum from 6 April 2024. For example:
- A Pension Commencement Lump Sum (PCLS); or
- The tax-free element of an Uncrystallised Funds Pension Lump Sum (UFPLS)
- The tax-free element of any drawdown payments (including flexi-access drawdown.
Here’s how to work out roughly how close you are to the LSDBA:
- The amount of LSA you have used, as set out above.
Plus
- The value of any benefits paid as a Serious Ill Health Lump Sum before age 75
- The value of any tax-free lump sum death benefits paid to your beneficiaries following your death.
Alternatively, if you have taken less than 25% of your benefits as a tax-free lump sum, and have not taken any benefits from your pension savings since 6 April 2024, you can apply to any of your pension schemes for a Transitional tax-free amount certificate. Further details of this option can be found below.
Transitional tax-free amount certificate
If you have taken benefits from a pension scheme prior to 6 April 2024, you can apply to any of your registered pension schemes and ask them to provide you with a Transitional tax-free amount certificate (TTFAC). The TTFAC will detail the amount of LSA and LSDBA that you have remaining at 6 April 2024.
You are only eligible to apply for a TTFAC if;
- You have taken pension benefits between 6 April 2006 and 5 April 2024
- You have had no new pension benefits paid to you on or after 6 April 2024
- You can provide a complete and accurate record of the tax-free amounts you have already taken from all of your registered pension schemes.
You do not have to apply for a TTFAC. However, HMRC recommend anyone who has taken benefits from a registered pension arrangement prior to 6 April 2024; and taken less than 25% of their benefits as a tax-free cash sum, should apply for a TTFAC from the first registered pension scheme that they will take benefits from on or after 6 April 2024. See the HMRC website for more information.
If you wish to apply for a TTFAC from USS, we will require a letter from each of your pension providers confirming:
- The amount of Lifetime Allowance you have used prior to 6 April 2024 and how much of your LTA was paid as a tax-free lump sum. This includes the tax-free element of any Uncrystallised Funds Pension Lump Sums (UFPLS) or drawdown payments.
- The amount of any benefits paid as a Serious Ill Health Lump Sum before age 75.
USS will then have three months from your application date to issue you with a certificate, if we are satisfied that complete evidence has been provided.
You can use our Benefit Calculator in My USS to estimate the value of your USS benefits and savings when you retire.
And remember, if you have any pension savings outside of USS, you’ll need to get the value of those benefits and savings from your other provider(s).
What happens if you go over the LSA and LSDBA?
If you go over the LSA or LSDBA, you may need to pay tax on any lump sum benefits in excess of your available allowances. This will be taxed at your marginal rate and we’ll deduct this at source from any taxable lump sum benefits we pay to you.
In the event of your death, any lump sum death benefit paid in excess of your remaining LSDBA will be taxed at your beneficiary’s marginal rate. Your Legal Personal Representative will be responsible for reporting this information to HMRC, who will then calculate the tax to be deducted and collect this directly from your beneficiaries.
Need a hand?
Sign up for a free Focus on Pension Tax webinar to learn more about pension tax, including USS specific tax mitigation options.
If you want to seek guidance or take financial advice on the options available to you, visit the guidance and financial advice page. You’ll find a range of resources to support your planning and you can also find information on how to access an independent financial adviser.